Melbourne house prices jumped 3.1 per cent in July and have been the key driver in the 1.5 per cent increase in combined capital city dwelling values for the month.
CoreLogic’s latest home value index shows house prices rose in Sydney by 1.4 per cent, while Canberra prices jumped by 2.4 per cent but fell in Brisbane (-0.6%), Perth (-1.3%) and Darwin (-1.2%).
“The recent bounce in capital gains may be partially due to a recovery from the seasonal slump in values recorded in April and May,” Mr Lawless said.
“However, other factors, such as stamp duty concessions for first home buyers in New South Wales and Victoria, may also be having a positive impact on market demand.
“It’s still too early to measure the effect of first home buyer incentives, which went live on July 1. However, historically, the first time buyer segment has been very responsive to stimulus measures.”
Despite the higher month-on-month capital gains in June and July, the quarterly trend rate of growth has clearly reduced. The rolling quarterly pace of capital gains across the combined capitals has fallen from 3.6 per cent in February this year to reach 2.2 per cent at the end of July.
The slowdown in growth conditions is most evident across the hottest markets, with the quarterly growth trend reducing from 5.0 per cent in Sydney earlier this year to 2.2 per cent at the end of last month. Melbourne growth conditions have also slowed, though to a lesser extent, with growth easing from a 2017 quarterly peak of 5.5 per cent to 4.2 per cent.
The divergence in growth rates between Sydney and Melbourne is also evident in auction clearance rates. Sydney’s clearance rate has been below 70 per cent for seven of the past eight weeks, while Melbourne auction clearance rates have consistently held around the mid-70 per cent range.
Mr Lawless said, “Melbourne appears to be benefitting from consistently high population growth which is creating strong demand for housing, as well as consistently high jobs growth and more affordable housing options relative to Sydney.”
At the other end of the growth spectrum, Perth and Darwin have continued to see dwelling values slip lower over the month, taking the cumulative decline to 10.2 per cent in Perth and 14.5 per cent in Darwin since both markets peaked in 2014.
The ease in the rate of decline has been most visible in Perth, providing a signal that the Western Australian capital may be approaching the bottom of the downturn; listing numbers have been falling across Perth, which is a positive sign of improving conditions, and transaction numbers have found a new floor at around 2,500 sales per month.
The rise in dwelling values across the combined capitals over the month has not been matched by a rise in weekly rental rates, which means gross rental yields have slipped lower over the month. Gross yields are once again at new record lows across the combined capital cities, driven by further falls in yields across both Melbourne and Sydney.
Across the combined capitals, the gross rental yield on a dwelling is now 3.1 per cent, with the lowest yields in Melbourne (2.7 per cent) and Sydney (2.9 per cent).
Over the past five years, gross rental yields have compressed across every capital city apart from Hobart, where yields are unchanged at a reasonably healthy 5.2 per cent. The most substantial decline in rental yields has been in Sydney, where dwelling values are up 77.3 per cent compared with a 15.5 per cent rise in weekly rents.
While the housing market has slowed from the recent highs of late 2016 and early 2017, the trend rate of growth remains robust.
Mr Lawless said the combination of several factors working together is causing the market to lose steam.
“Higher mortgage rates and tighter credit policies have dented investor appetite. This is clear from the RBA’s monthly credit aggregates, which show investment-related housing credit growth has consistently slowed from late last year,” he said.
Mr Lawless added that higher mortgage rates are now also impacting on interest-only loans as well as fixed rate loans, which is likely to further disincentivise some prospective buyers.
Considering household debt levels are at record highs, rises in the cost of debt will likely have an amplified effect on household decision-making. At the end of June, discounted variable mortgage rates were up 15 basis points for owner occupiers and were 35 basis points higher for investors.
CoreLogic confirmed that advertised stock levels have begun to rise in some cities, particularly in Sydney where total listing numbers are now 14 per cent higher than at the same time a year ago.
Mr Lawless said, “More choice for buyers implies less urgency, which may be easing upward pressure on prices. Affordability challenges are also likely to be impacting buyer demand across Sydney, where the median house price remains over $1 million.”
Considering these factors, Mr Lawless expects the pace of capital gains to continue to ease through 2017, particularly in Sydney and to a lesser degree in Melbourne, where value growth has been most extreme over the past five years.
